The killer application for electronic networks isn't video-on-demand. It's going to hit you where it really matters - in your wallet. It's, not only going to revolutionize the Net, it will change the global economy.

By Steven Levy

Clouds gather over Amsterdam as I ride into the city center after a day at
the headquarters of DigiCash, a company whose mission is to change the
world through the introduction of anonymous digital money technology. I
have been inundated with talk of smart cards and automated toll takers and
tamper-proof observer chips and virtual coinage for anonymous network
ftps. I have made photocopies using a digital wallet and would have bought
a soda from a DigiCash vending machine, but it was out of order.

My fellow passenger and tour guide is David Chaum, the bearded and
ponytailed founder of DigiCash, and the inventor of cryptographic
protocols that could catapult our currency system into the 21st century.
They may, in the process, shatter the Orwellian predictions of a Big
Brother dystopia, replacing them with a world in which the ease of
electronic transactions is combined with the elegant anonymity of paying
in cash.

He points out the plaza where the Nazis rounded up the Jews for
deportation to concentration camps.

This is not idle conversation, but a topic rooted in the Chaum
Weltanschauung - state repression extended to the maximum. David Chaum has
devoted his life, or at least his life's work, to creating cryptographic
technology that liberates individuals from the spooky shadows of those who
gather digital profiles. In the process, he has become the central figure
in the evolution of electronic money, advocating a form of it that fits
neatly into a privacy paradigm, whereby the details of people's lives are
shielded from the prying eyes of the state, the corporation, and various
unsavory elements.

Fifteen years ago, David Chaum seemed a Don Quixote in Birkenstocks, a
stray computer scientist talking of a technology that appeared more rooted
in science fiction than high finance. Today, still bearded, but wearing a
well-tailored suit, he stands in the thick of a movement that seems
unstoppable - the digitization of money. His passion now is to explain
that the change need not be oppressive. He travels among bankers and
financiers, he runs a company, he proselytizes. And he hopes somebody
listens, because the wild card in the era of digital money is anonymity,
and David Chaum thinks we're in trouble without it.

Dollar Bills or Bill Dollars

The next great leap of the digital age is, quite literally, going to hit
you in the wallet. Those dollar bills you fold up and stash away are
headed, with inexorable certainty, toward cryptographically sealed digital
streams, stored on a microchip-loaded "smart card" (a plastic
card with a microchip), a palm-sized "electronic wallet" (a
calculator-sized reader and loader for those cards), or the hard disk of
your computer, wired for buying sprees at the virtual mall.

Of course, real money - the trillions of dollars handled each day by
banks, other financial institutions, and government clearinghouses - is
already digital. No physical tokens are exchanged: all transactions are
conducted using streams of bits. But digitizing the final mile of
electronic money, where the coin and dollar bill go the way of the vinyl
LP, will make all the difference in the world. It will not only change the
physical way you spend your money, it will alter the way you view your own
economic being. And depending on the manner in which it is implemented,
digital money might allow others to view your financial status with a
decidedly discomfiting intimacy.

Is e-money really going to happen? Inevitably. Hard currency has been a
useful item for a few millennia or so, but now it has simply worn out its
welcome. A recent paper by several cryptographers at the Department of
Energy's Sandia National Labs in Albuquerque, New Mexico, begins by
enumerating what all e-money advocates identify as the fatal flaws of cold
hard cash: "The advent of high-quality color copiers threatens the
security of paper money. The demands of guarding it make paper money
expensive. The hassles of handling it (such as vending machines) make
paper money undesirable. The use of credit cards and ATM cards is becoming
increasingly popular, but those systems lack adequate privacy or security
against fraud, resulting in a demand for efficient electronic-money
systems to prevent fraud and also to protect user
privacy."

Steven Levy (steven@echoync.com) is a fellow at the Freedom Forum Media Studies Center. He is the author of Hackers.